Are the U.S. and China trading places?

Commentary: Competing narratives obscure facts on GDP gap

By

BarryEichengreen

BEIJING (Caixin Online) — By now, everyone has grown accustomed, if not physically weary, of articles extolling China’s economic dynamism and rehearsing America’s economic decline. While the United States is only now beginning to recover from the most serious recession in nearly 80 years, China skated through the global financial crisis essentially unscathed.

Even if the growth of the Chinese economy now slows to 7.5%, that will still be triple the rate of expansion of the United States, where growth in the wake of the crisis remains subdued. It will not be many years before China overtakes the U.S. in sheer economic size. And with this reversal of economic fortune will come a reversal of political fortune, as China assumes the leading role on the global geopolitical stage.

Yet, one also hears hints of a very different narrative, in which the United States is poised to experience an economic resurgence and China is about to hit the wall. In this view, the Chinese model of export-led growth fueled by cheap labor has run its course.

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At home, there is pressure for the fruits of productivity growth to be shared more widely. Abroad, companies like Apple
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feel pressure to accede to improved pay and conditions in the Chinese factories where their products are assembled. China, as a result, is seeing its labor costs rise and export competitiveness decline. The trade deficit recorded in February is only the first of many, in this view.

Increased consumption by Chinese households could in principle substitute for slowing export growth, but spending habits are slow to change. Currently, moreover, Chinese spending is depressed by weak property prices, which augur problems for state-linked construction companies, local governments and banks. China will be lucky to hit its 7.5% growth target this year, the skeptics contend, and its growth rate will step down further after that, to as little as 3% if über-bears like Peking University professor Michael Pettis are to be believed.

In the United States, meanwhile, there has been a string of four positive monthly employment reports. Even the somewhat disappointing early April employment growth report was above trend. The Bureau of Economic Analysis reported that gross domestic income grew by 4.4% in the fourth quarter of 2012. Manufacturing production, in particular, has grown impressively, underscoring recent optimism about the “re-onshoring” of previously offshored manufacturing jobs.

American manufacturing, in other words, is back. U.S. companies have taken the Great Recession as an opportunity to streamline their operations and boost productivity. The auto companies, which three years ago were on the verge of bankruptcy, can now barely keep pace with demand.

The United States is the unquestioned world leader in the application of computing power and artificial intelligence to leading-edge consumer goods. Instead of a chicken in every pot, the U.S. now has an iPhone in every car. China has nothing remotely resembling America’s dynamic start-up culture. Its role is as consumer of the products of U.S. ingenuity, not as developer — not now or anytime soon.

So is the era of Chinese ascendency and U.S. decline now over? To this contrarian view I would say: not so fast. Chinese growth may be slowing, but Beijing still has ample policy room for maneuver. It has plenty of policy levers to pull — from further reductions in reserve requirements for banks to further increases in infrastructure spending — to prevent its economy from slowing excessively. Labor costs may be rising on the coast, but there remains abundant cheap labor in the interior of the country. And slowly but steadily, Chinese producers are moving up-market into the production of more technologically sophisticated goods, from wind turbines to solar panels.

In the U.S., meanwhile, the recovery now appears secure, but it is an anemic recovery at best. No one expects the 4.5% growth of gross domestic income in the fourth quarter of 2012, which was heavily driven by inventory restocking, to be matched going forward, or for growth to exceed 2.5% in the medium term. Housing prices continue to weaken, weighing on consumer sentiment.

Recent evidence suggests, moreover, that the productivity miracle set on foot by the Great Recession is beginning to fade. And while high-tech innovations may mean high profits for the firms spawning them, there is little evidence of their boosting productivity economy wide or generating the large numbers of good middle class jobs that the United States so desperately needs.

Perhaps most disturbingly, the political gridlock that prevents the U.S. from dealing with its medium-term fiscal challenges shows no signs of loosening. This may change after the November 2012 presidential election. Then again, it may not.

Chinese policy-makers need to acknowledge and address the major challenges facing their economy, while U.S. officials deserve recognition for the positive achievements of the last three years. But none of this changes the fact that China will continue to close the relative GDP gap. The prerequisites for it doing so remain firmly in place.

Barry Eichengreen is the George C. Pardee and Helen N. Pardee Professor of Economics and Political Science at the University of California, Berkeley

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